Exchange Rate Mechanism

Part of the debate – in the House of Commons at 7:13 pm on 23rd October 1990.

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Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee 7:13 pm, 23rd October 1990

The right hon. Member for Worthing (Mr. Higgins) is right in saying that, under the exchange rate mechanism, fiscal policy will once again come into its own. The right hon. Member for Blaby (Mr. Lawson) called Britain's entry to the ERM a momentous decision, and of course it is. I am in favour of exchange rate stability where it can be obtained, and the attempts made by the right hon. Member for Blaby to shadow the deutschmark were not unworthy. What I had against him was that the rate that he chose was wrong. It should have been much lower.

My awareness of all such matters draws on my background knowledge that many of our problems were caused by an overvalued exchange rate, and that fundamental mistakes were made in trying to deal with them.

In the post-war years, there were two important decisions to devalue, in 1949 and 1967. In both cases, the rate was maintained largely in response to American pressure—in 1949 because of the American loan, and in 1967 because of a personal commitment by Harold Wilson to Lyndon Johnson.

The first devaluation, from $4 to $2·40, was very successful, and led to the benefits that we obtained through the 1950s—so that when the Community was born, we considered ourselves too successful to take part even in the Messina talks.

Our success ended with the level of spending that was reached in the "never had it so good" years of Harold Macmillan. By 1964, we again faced an acute balance of payments crisis. I entered Parliament that year convinced of the need to devalue. I was impressed by de Gaulle's devaluation, which was accompanied by deflation—a combination that I always thought made a great deal of sense. Devaluation opened opportunities abroad and restricted imports, while deflation released goods for export. I looked for a similar course of action to be followed in Britain, but our parliamentary majority was small, and I realised that devaluation might have to be postponed until we had a working majority.

It was with something approaching horror that I realised in the spring of 1966 that there was to be no devaluation. In the following months, I and Joel Barnett, now Lord Barnett, with whom I shared the chairmanship of the parliamentary Labour party's economic and finance group, called on Cabinet Ministers, urging on them the case for devaluation. Unfortunately, the response was slow. By 1967, devaluation from $2·80 to $2·40 was forced on the Government. It was not enough in my view, but it did give industry some help, and by 1969 we achieved a balance of payments surplus.

It will be seen that fundamental adjustments were required before both devaluations. In the first instance, we had to adjust from dealing with the problems of the war years. In the second, it was a case of adjusting to the aftermath of the boom created by Harold Macmillian. As we all know, devaluation helps exports and reduces imports. It helps all industry, and manufacturing industry in particular. It can have inflationary consequences, but there is a time lag before they manifest themselves, and one can use it to limit their effects.

The City does not like devaluation. It wants a strong pound not for the reasons one might think, but because of the better investment opportunities that it offers. In deciding between manufacturing industry and the City, Governments are sometimes neutral. Occasionally they favour the City, as did the present Government initially, before realising that our balance of payments depends mainly on manufacturing industry providing tradeable goods—the largest part of our exports.

Other Governments favoured industry. Like all post-war Governments, they worried about inflation, and in the end always chose the easy way of reducing it, by operating a high exchange rate. But the price for that has to be paid in the form of lost exports and yet another decline in Britain's manufacturing processes. We are again left with exhortations to reduce pay demands and so maintain an overvalued exchange rate.

We have seen time and again a high level of optimism about our prospects, but we are entering the ERM against a background of economic failure. We have suffered nothing less than an economic failure despite the enormous advantages of North sea oil. We squandered our oil revenues, time has run out, so we have returned to the exchange rate mechanism.

In The Sunday Times of 25 February this year, the Prime Minister said that As the right policies"— she was still very optimistic at that stage— were kept going"— that is, throughout the whole period of this Government— economic growth and productivity would start to rise again. The article continued: Then, watch out, France and West Germany. 'My ambition is that we catch up with France … And then we catch up with Germany.' That is the kind of nonsense that we hear from time to time, but rarely to quite such an extent. The Government have gone through three phases. The first was the phase during which they said, "Pay demands don't matter; the money supply will be the master." When that nonsense subsided, after ruining 20 per cent. of our industry—in my constituency, I am sorry to say that it ruined 30 per cent. of well-run small businesses between 1979 and 1981—and when that policy failed, the Government resorted to the second standby, which was exhortation. I have nothing against exhortation, but it is not a policy in itself. Eventually, it is seen to be inadequate and other policies are looked for.

The third phase involved the ERM. There are two ways of looking at the ERM. One can look at it as a way of obtaining some stability in currency markets. I am not against that—I am in favour of it—but the Government want more than stability. They want to use the mechanism to discipline industry and to punish workers with threats of unemployment and factory closures. The right hon. Member for Blaby dealt with that. If ERM will not do that, European monetary union will be even less forgiving.

Some hope that enthusiasm for EMU will lead to a continuing strong role for the City of London. I fear that Frankfurt is likely to follow Tokyo in the fulfilment of the principle that markets follow money—and I believe that, eventually, markets do, indeed, follow money. The City was born on the back of the greatest industrial centre in the world. New York followed suit. If there is a case for EMU, it is not that it will help us to retain London as the European financial centre. We need to bear in mind Winston Churchill's comment that we should make finance less proud and industry more content. That is more needed than ever before. Of course, we must help the City of London as a revenue earner but not at the expense of our industry.

What are the prospects for a European central bank? I read with interest the article by my hon. Friend the Member for Durham, North (Mr. Radice). He suggested that Britain would have a representative and that the bank might have to report to the European Parliament and the Council of Ministers. Controlling a central bank in one country is difficult enough. I saw the day-to-day tussles here, where the central bank is nationalised. As we know, it is even more difficult in Germany. Our problems with regional policy and our problems in obtaining agreement because of language difficulties are underrated. To think in terms of other countries paying for our regional policy when we cannot even pay for a proper regional policy ourselves is to live in a dreamland.

Why did we nationalise the Bank of England? We nationalised it because it had too much economic power. We have forgotten all of that. Why did the move have the support of prominent Conservatives such as Bob Boothby? An international bank will have immense powers, although it will supposedly be controlled by different people from different countries with different views and different languages. How can one achieve such control? Since when have politicians—let alone the Labour party—been such friends of the bankers that they have wanted to hand over to them authority in the day-to-day running of monetary policy for the whole of Europe? We cannot be sure that our Prime Minister will be as powerful as the chairman of such a central bank. What an abrogation of power.

It is arguable that Montague Norman, formerly Governor of the Bank of England, did more to create a picture of Britain between the wars than Ramsay MacDonald or Baldwin. Can we really suggest that such a powerful figure could be controlled by the European Parliament? Such a figure will run rings around it and around the divisions in it. In day-to-day operations, even the Council of Ministers will find itself outranked.

When we look at the limited powers of the Bank of England and the Fed in Washington, we find powers far less extensive than those that some of us are prepared to accept. I used to consider that I had an obligation to explain the motives of bankers to my hon. Friends and say that they were not the cruel people so many thought them to be. I now find myself having to question my hon. Friends' admiration. Why have we come to love the bankers whom we used to criticise so harshly? The reason seems to be that we are looking for a panacea—a way out of difficulties of our own making. There is no panacea: we shall rise by our own efforts or not at all.